18/8/19: Migration Policy vs the Law of Unintended Consequences

President Trump's policies are a rich field for sowing evidence on the application of the law of unintended consequence in economic policies. Take his Trade War with China that so far resulted in ca USD20 billion in fiscal receipts and USD26 billion payouts in subsidies to U.S. farmers, netting a fiscal loss of USD 6 billion (https://trueeconomics.blogspot.com/2019/06/17619-lose-lose-and-lose-some-more.html), while generating gains for European exporters (https://trueeconomics.blogspot.com/2019/08/15819-winning-trade-wars-round-3.html) and shrinking net real exports for the U.S. economy (https://trueeconomics.blogspot.com/2019/08/1919-losin-spectacularly-trump-trade.html) and driving losses to the U.S. exporters (https://trueeconomics.blogspot.com/2019/07/31719-fed-rate-cut-wont-move-needle-on.html). Another example, the never-ending rhetorical and regulatory war against skilled (and other) migration.

On the latter, we have plenty of evidence drawn from Mr. Trump's predecessors that conclusively shows the costs of severely restrictive application of the skills-based migration quotas. And, thanks to Mayda, A M, F Ortega, G Peri, K Shih, and C Sparber 2017 paper, titled “The Effect of the H-1B Quota on Employment and Selection of Foreign-Born Labor” (NBER Working Paper No. w23902, https://www.nber.org/papers/w23902.pdf), we now have an in-depth analysis of the mechanics by which unintended consequences of restricting skilled migration impose these economic losses on the U.S.

The authors looked at how changes in H-1B policy, enacted over the years, affect the characteristics of migrants entering the U.S. and how these changes alter U.S.-wide productivity and wages.

Per authors, "The economic intuition [behind the study] is simple. Firms across the globe compete to hire highly skilled workers. The strict quota and the lottery allocation generate uncertainty in acquiring the legal right to work in the US even after securing a job offer. Hence, talented foreign nationals might elect to work elsewhere. Similarly, US firms face uncertainty over whether they will be allowed to employ the top job candidates they have identified. Some firms might elect to forgo this uncertainty altogether by turning to alternative labour sources."

"First, we examine H-1B quality. ... ...H-1B restrictions have particularly hindered the employment of the highest ability foreign-born workers. Anyone who believes immigration policy should be designed to attract ‘the best and brightest’ workers to the country should be troubled by the discovery that restrictions to aggregate inflows generate the opposite effect. Quantitatively, the number of new H-1B workers from the highest wage quintile is nearly 50% lower than it would have been in the absence of H-1B restrictions, but the number of new H-1B workers in the median wage quintile is unchanged." In other words, if wages are a proxy for talent, skills and productivity, reducing H1B quotas appears to reduce availability of more skilled, more talented and more productive foreign workers, while having zero impact on availability of mid-range skills, talents and productivity workers.

Worse, reduced H1B quotas also increased concentration of H1B attaining firms (or reduced the pool of employers with a meaningful access to H1B workers). Authors conclude that "It is possible that when faced with the uncertainty and costs of the H-1B hiring process, economies of scale and network externalities arise that favour firms specialising in H-1B employment and workers with specialised knowledge about the legal hiring process." Or put differently, H1B quotas restriction may be fuelling increase in the share of foreign talent brought into the U.S. by outsourcing agencies and a handful of very larger employers. This selection bias does not appear to be linked to higher productivity and is, therefore, welfare reducing as compared to a system where firms that can generate higher productivity increases by employing foreign workers gain better access to H1B via markets.

In summary, "we presume that by reducing the H-1B cap from 195,000 in 2001-2003 to 85,000 today, policymakers intended to reduce new H-1B employment at for-profit firms and possibly increase employment of competing US-born workers. The policy achieved the first but not the second goal. Moreover, the cap restriction also generated consequences that were likely unintended. The policy change has particularly deterred workers with the highest earnings potential from entering the US labour market. Given the potential for productivity-enhancing technological gains generated by H-1B workers, this loss could reverberate throughout the economy. Other important effects are distributional and favour computer-related occupations and firms that use the H-1B programme heavily."

Consequences. A lesson for MAGA crowd from their predecessors.

2/4/19: Brain Drain Reversed or Inverted?

Generally, we associate skilled emigration with the phenomenon of 'brain drain' or a zero sum game - the loss of human capital from the country of origin and a corresponding gain to the recipient country. However, as common, the real nature of these effects is more complex than the first order analysis implies.

A new paper by Fackler, Thomas, Giesing, Yvonne and Laurentsyeva, Nadzeya, titled "Knowledge Remittances: Does Emigration Foster Innovation?" (CESifo Working Paper No. 7420) accessible via https://ssrn.com/abstract=3338774, looks at the issue of knowledge flows relating to emigration. The authors find that based on "industry-level patenting and migration data from 32 European countries," "...emigration in fact positively contributes to innovation in source countries. ... While skilled migrants are not inventing in their home country anymore, they contribute to cross-border knowledge and technology diffusion and thus help less advanced countries to catch up to the technology frontier."

More specifically, authors show that "one percent increase in the number of emigrants increases patent applications by 0.64 percent in the following two years. This result is statistically significant at the one percent level and robust to controls, fixed effects, and varying lags. The effect is quantitatively more pronounced when we consider only the flows of migrants with patenting potential."

A picture worth a 1,000 words:

Notice, the above suggests that the positive effect of opening up migration channels on technological convergence is evident as early as two years prior to the EU Accession of 2004. The same is confirmed in the following chart:

In line with their findings, the authors suggest that

• The EU "could benefit from further facilitating migration within Europe", by focusing on reducing cultural and social barriers to migration, such as "language and administrative barriers, ...ensuring the recognition of foreign qualifications and the promotion of language courses at all age levels."
• "Another policy implication is to ease skilled migration to Europe from outside the European Union. This could be achieved by easing the access to European labour markets and the recruitment of highly qualified foreign workers. While the Blue Card has been a step in this direction, its scope could be increased to obtain a higher impact and administrative barriers should be reduced." 

Update: Similar findings are reported in Kim, Jisong and Lee, Nah Youn, High-Skilled Inventor Emigration as a Moderator for Increased Innovativeness and Growth in Sending Countries, East Asian Economic Review Vol. 23, No. 1 (March 2019) 3-26: https://ssrn.com/abstract=3360938. Their paper uses data from 154 countries to show that high-skilled inventor emigration rate has a positive growth effect on the country of origin (COO) by spurring "knowledge diffusion and technology transfer back to their COOs, which in turn affects innovation and growth in their home countries. The result indicates that the direct negative impact of the brain drain can be mitigated by the positive feedback effect generated by the high-skilled inventor emigrants abroad. When coupled with an active trade policy that reinforces growth, countries can partially recoup the direct effect of the human capital loss."

25/12/2014: Skilled Immigration and Employment in the U.S.

There is a persistent debate in economics about the effects of migration of the highly-skilled workers on employment prospects and careers of the natives. Here is one interesting study looking at such effects within the context of the targeted immigration programme based on skills within the particular set of sectors - the STEM, or more commonly, Science and Technology.

Kerr, Sari Pekkala and Kerr, William R. and Lincoln, William Fabius, Skilled Immigration and the Employment Structures of U.S. Firms (see arvard Business School Entrepreneurial Management Working Paper No. 14-040: http://ssrn.com/abstract=2354963) "study the impact of skilled immigrants on the employment structures of U.S. firms … [accounting for] the fact that many skilled immigrant admissions are driven by firms themselves (e.g., the H-1B visa)." The authors "find rising overall employment of skilled workers with increased skilled immigrant employment by firm. Employment expansion is greater for younger natives than their older counterparts, and departure rates for older workers appear higher for those in STEM occupations compared to younger worker."

From the point of view of countries, like Ireland, relatively open to immigration of skilled workers, but without a specific skills-based 'filter' (Irish system is open to migrants on the basis of nationality, rather than skills, but has strong selection biases into skills-based immigration due to lack of jobs creation outside the STEM categories of jobs), the above suggests that skills depreciation in the STEM sector can be a problem for the natives. As supply of younger STEM employees from abroad rises, there can be a tendency for displacement of older workers, premature termination or flattening out of careers and, subsequently, lower supply of pensions and income provisions in later years of life.

4/12/2013: Brain Drain and Institutions

A very interesting working paper relating to the issues of human capital and its effects on society and economy, titled "Does Brain Drain Lead to Institutional Gain?" by Li, Xiaoyang and McHale, John (of NUI Galway) and Xuan, Zhou (http://ssrn.com/abstract=2350203).

Per authors, "A country’s endowment of human capital can affect its institutions through various channels. This raises the possibility that skilled emigration can leave its mark on a country’s institutional development. We combine recent datasets on emigrant stocks and institutional quality to explore the impacts of mobile human capital on home country’s institutional quality."

"Our results indicate that skilled emigrants have a positive effect on political institutions (i.e., voice and accountability, and political stability and absence of violence) but a negative effect on economic institutions at home (i.e., government effectiveness, regulatory quality, and control of corruption). These results are robust to the inclusion of other known determinants of institutional quality."

With some caveats relating to the difficulties involved in assessing causality in a cross-sectional data study: "...we attribute the association to be causal as we use geography-based instruments for emigrant human capital"